Microsoft's slight earnings beat is not enough to lure us off the sidelines

Published Tue, Jan 24 20238:41 PM ESTUpdated Wed, Mar 8 20232:10 PM EST

Microsoft (MSFT) delivered better second-quarter results than many on Wall Street anticipated, initially sending shares soaring in afterhours trading. But the stock retreated after management announced softer-than-expected guidance for the technology giant's third quarter — underscoring our decision to remain sidelined buyers for now. Revenue for the three months ended Dec. 31 came in at $52.75 billion, slightly missing analysts' forecasts of $52.94 billion, according to estimates from Refinitiv, even as revenue growth from the cloud computing unit, Azure, slightly outperformed expectations. Adjusted earnings-per-share of $2.32 a share beat analysts' estimates by 3 cents. Bottom line Microsoft was able to pull off a quarter that was not as poor as feared, boosting shares 3% to 4% after the market closed. It was a welcomed, if brief, relief rally after weeks of uncertainty stemming from ever-lower revenue estimates, a layoff announcement that raised questions about the health of the business and negative sentiment voiced by CEO Satya Nadella over the state of the tech industry. So how did Microsoft manage to pull off this small earnings beat? For one, management guided for operating expenses to be around $14.39 billion to $14.49 billion on an adjusted basis, but the actual results were well below that — closer to $13.84 billion. The results are indicative of what we mean when calling for companies to pull back on expenses to protect earnings-per-share in a slowing, or even declining, revenue-growth environment. But Microsoft's revenue outlook for its third quarter missed the mark. And an even bigger deceleration in Azure revenue growth is likely give fuel to the bears who have predicted 2023 will be an uphill year for the cloud software industry. Tonight's subsequent reversal in Microsoft's stock price after management unveiled its guidance is why we always urge investors to wait to trade a stock until after listening into a company's earnings conference call. We remain intrigued by Microsoft's investment in OpenAI and the revolutionary ChatGPI platform . But continued uncertainty around growth in cloud computing and timing over when the PC market will trough — and what growth looks like thereafter — keeps us as long-term holders, but on the sidelines. Productivity and business processes revenue of about $17 billion was a beat and came in at the high end of management's adjusted guidance range (which accounts for foreign exchange) of $16.72 billion to $17.02 billion. Office 365 commercial revenue increased 18% on a constant currency basis, with seat growth up 12%, driven by offerings for small-and-medium businesses and frontline